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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549   FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2004 or (   ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number 0-30539 TVIA, INC.  Delaware
    
    77-0549628(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)
 4001 Burton Drive, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code) Registrants telephone number, including area code: (408) 982-8588   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No (   ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (   ) No (X) On October 31, 2004, 22,808,450 shares of the Registrants Common Stock,
$0.001 par value per share, were outstanding.




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TVIA, INC. AND SUBSIDIARY FORM 10-Q QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 INDEX PagePart I: Financial InformationItem 1: Financial StatementsUnaudited Condensed Consolidated Balance Sheets
    
    
    1Unaudited Condensed Consolidated Statements of Operations
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4: Controls and Procedures
    
    
    27Part II: Other InformationItem 4: Submission of Matters to Vote of Security Holders
    
    
    27Item 6: Exhibits
    
    
    28Signatures
    
    
    29Exhibit IndexEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (in thousands)
 SEPTEMBER 30,
    
    MARCH 31,2004
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,012
    
    
    $
    3,259Short-term investments
    
    
    21,780
    
    
    
    23,947Accounts receivable, net
    
    
    365
    
    
    
    295Inventories
    
    
    642
    
    
    
    602Prepaid expenses and other current assets
    
    
    736
    
    
    
    1,241Total current assets
    
    
    26,535
    
    
    
    29,344Property and equipment, net
    
    
    1,537
    
    
    
    1,947Other assets
    
    
    54
    
    
    
    112Total assets
    
    $
    28,126
    
    
    $
    31,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    160
    
    
    $
    201Accrued liabilities and other
    
    
    681
    
    
    
    657Short-term portion of capital leases
    
    
    255
    
    
    
    486Total current liabilities
    
    
    1,096
    
    
    
    1,344Commitments and contingencies (Note 7)Stockholders equity:Common stock, $0.001 par value, 125,000 shares
authorized, 22,807 and
22,576 shares outstanding, respectively
    
    
    23
    
    
    
    23Additional paid-in-capital
    
    
    92,965
    
    
    
    92,798Accumulated comprehensive income (loss)
    
    
    (65
    )
    
    
    8Accumulated deficit
    
    
    (65,143
    )
    
    
    (62,020
    )Treasury stock
    
    
    (750
    )
    
    
    (750
    )Total stockholders equity
    
    
    27,030
    
    
    
    30,059Total liabilities and stockholders equity
    
    $
    28,126
    
    
    $
    31,403
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 1




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts) FOR THE THREE MONTHS
    
    FOR THE SIX MONTHS ENDEDENDED SEPTEMBER 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    $
    617
    
    
    $
    620
    
    
    $
    1,145
    
    
    $
    1,200Cost of revenues
    
    
    351
    
    
    
    354
    
    
    
    643
    
    
    
    697Gross profit
    
    
    266
    
    
    
    266
    
    
    
    502
    
    
    
    503Operating expenses:Research and development
    
    
    1,311
    
    
    
    1,389
    
    
    
    2,510
    
    
    
    3,049Sales, general and administrative
    
    
    653
    
    
    
    610
    
    
    
    1,314
    
    
    
    1,345Total operating expenses
    
    
    1,964
    
    
    
    1,999
    
    
    
    3,824
    
    
    
    4,394Operating loss
    
    
    (1,698
    )
    
    
    (1,733
    )
    
    
    (3,322
    )
    
    
    (3,891
    )Interest income
    
    
    100
    
    
    
    100
    
    
    
    199
    
    
    
    194Gain from sale of software unit
    
    
    
    
    
    
    9,075
    
    
    
    
    
    
    
    9,075Net income (loss)
    
    $
    (1,598
    )
    
    $
    7,442
    
    
    $
    (3,123
    )
    
    $
    5,378Basic net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.34
    
    
    $
    (0.14
    )
    
    $
    0.24Diluted net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.32
    
    
    $
    (0.14
    )
    
    $
    0.23Shares used in the per share calculation:Basic
    
    
    22,731
    
    
    
    22,198
    
    
    
    22,703
    
    
    
    22,171Diluted
    
    
    22,731
    
    
    
    23,612
    
    
    
    22,703
    
    
    
    23,255
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 2




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
 FOR THE SIX MONTHSENDEDSEPTEMBER 30,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (3,123
    )
    
    $
    5,378Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    595
    
    
    
    868Write-down of license technology
    
    
    81
    
    
    
    Change in assets and liabilities:Accounts receivable
    
    
    (70
    )
    
    
    144Inventories
    
    
    (40
    )
    
    
    404Other current assets
    
    
    (270
    )
    
    
    (4,065
    )Accounts payable
    
    
    (41
    )
    
    
    (59
    )Accrued liabilities and other
    
    
    24
    
    
    
    (394
    )Net cash provided by (used in) operating activities
    
    
    (2,844
    )
    
    
    2,276Cash flows from investing activities:Sales of available-for-sale investments
    
    
    6,554
    
    
    
    18,950Purchases of available-for-sale investments
    
    
    (4,460
    )
    
    
    (27,719
    )Proceeds from sale of software unit
    
    
    753
    
    
    
    Purchases of license technology
    
    
    
    
    
    
    (44
    )Purchases of property and equipment
    
    
    (186
    )
    
    
    (45
    )Proceeds from disposal of fixed assets
    
    
    
    
    
    
    46Net cash provided by (used in) investing activities
    
    
    2,661
    
    
    
    (8,812
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    167
    
    
    
    200Repayment of capital lease obligations
    
    
    (231
    )
    
    
    (297
    )Net cash used by financing activities
    
    
    (64
    )
    
    
    (97
    )Decrease in cash and cash equivalents
    
    
    (247
    )
    
    
    (6,633
    )Cash and cash equivalents at beginning of period
    
    
    3,259
    
    
    
    11,080Cash and cash equivalents at end of period
    
    $
    3,012
    
    
    $
    4,447
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 3




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TVIA, INC. AND SUBSIDIARY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1  INTERIM STATEMENTS The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three and six months ended September 30, 2004, are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2005. Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with general accepted accounting
principles have been condensed or omitted. These accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of Tvia, Inc. and subsidiary
(the Company) for the fiscal year ended March 31, 2004, which are included in
the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission on June 22, 2004. NOTE 2  SUMMARY OF SIGNIFICANT POLICIES Use of Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates, and such differences could be material and affect the results
of operations reported in future periods. Consolidation The condensed consolidated financial statements herein presented include
the results and financial position of Tvia and its wholly-owned subsidiary in
China. The functional currency of the Chinese subsidiary is the U.S. dollar;
accordingly, all gains and losses arising from foreign currency transactions in
currencies other than the U.S. dollar are included in the condensed
consolidated statements of operations. All intercompany transactions and
balances have been eliminated in the consolidation. Cash and Cash Equivalents and Short-Term Investments The Company considers all highly liquid investment securities with
original maturities of three months or less from the date of purchase to be
cash and cash equivalents. Management determines the appropriate
classification of short-term investments at the time of purchase and evaluates
such designations as of each balance sheet date. To date, all short-term
investments have been categorized as available-for-sale and are carried at fair
value with unrealized gains and losses, if any, included as a component of
accumulated comprehensive income in stockholders equity, net of any related
tax effects. Interest, dividends and realized gains and losses are included in
interest income in the condensed consolidated statements of operations. Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market value and include materials, labor and overhead. Allowances when
required are made to reduce excess and obsolete inventories to their estimated
net realizable values. 4




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Property and Equipment Property and equipment are carried at cost and are depreciated using the
straight-line method over the assets estimated useful life of two to five
years. Management has determined asset lives based on their historical
experience of technical obsolescence of equipment and the short life of tooling
that is specific to certain product families. Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles
for impairment. The Company reviews assets to be held and used whenever events
or changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. The Company measures recoverability of assets by
comparing their carrying amount to the future undiscounted cash flows that they
are expected to generate. Impairment reflects the amount by which the carrying
value of the assets exceeds their fair market value. Revenue Recognition The Company recognizes revenue from product sales upon shipment to the
original equipment manufacturers, or OEMs, and end users provided that
persuasive evidence of an arrangement exists, the price is fixed, title has
transferred, collection of resulting receivables is reasonably assured, there
are no customer acceptance requirements, and there are no remaining significant
obligations. Reserves for sales returns and allowances are recorded at the
time of shipment. Our sales to distributors are made under agreements allowing
for returns or credits under certain circumstances. The Company defers
recognition of revenue on sales to distributors until products are resold by
the distributor to the end user. The Company warrants its products; warranty
claims historically have been insignificant. The Company also sells software development kits and application modules
to OEMs. The Company recognizes sales of software development kits and
application modules when an agreement has been executed or a definitive
purchase order has been received and the product has been delivered, no
significant obligations with regard to implementation remain, the fee is fixed
and determinable and collectibility is probable. The maintenance portion of
the arrangements is recognized over the maintenance period on a straight-line
basis. Software Development Costs The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The
Company has expensed all software development costs to date as substantially
all of such development costs have been incurred prior to the Companys
products attaining technological feasibility. Research and Development Expenses Research and development expenses consist primarily of salaries and
related costs of employees engaged in research, design and development
activities. The Company expenses all research and development related expenses
in the period in which such expenses are incurred. Income Taxes Income taxes are accounted for on the asset and liability method. Under
this method, deferred income taxes are recognized based on the estimated future
tax effects of differences between the financial and tax basis of assets and
liabilities under the provisions of enacted tax laws. The effect on deferred
taxes of a change in tax rate is recognized in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred taxes to the amounts expected to be realized. Comprehensive Income (Loss) Comprehensive income or loss includes all changes in equity during a
period from transactions and events from non owner sources. A summary of
comprehensive income (loss) is as follows (in thousands): 5




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For the Three Months
    
    For the Six MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (1,598
    )
    
    $
    7,442
    
    
    $
    (3,123
    )
    
    $
    5,378Unrealized gain (loss) on
available-for-sale investments
    
    
    43
    
    
    
    (31
    )
    
    
    (73
    )
    
    
    (11
    )Comprehensive income (loss)
    
    $
    (1,555
    )
    
    $
    7,411
    
    
    $
    (3,196
    )
    
    $
    5,367
 Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and
Financial Accounting Standards Board Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation (FIN 44). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Companys stock at the date of grant over the stock option
exercise price. Expense associated with stock-based compensation is amortized
on an accelerated basis over the vesting period of the individual award
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28 (FIN 28). The Company accounts for stock issued to
non-employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure and Emerging Issues Task Force Consensus No. 96-18, Accounting
for Equity Instruments that are offered to other than employees for acquiring
or in conjunction with selling goods or services (EITF 96-18). Under SFAS
No. 123, SFAS No.148 and EITF 96-18, stock option awards issued to
non-employees are accounted for at their fair value, determined using the
Black-Scholes option pricing method. The fair value of each non-employee stock
option or award is remeasured at each period end until a commitment date is
reached, which is generally the vesting date. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based
employee compensation. For the Three Months
    
    For the Six MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (1,598
    )
    
    $
    7,442
    
    
    $
    (3,123
    )
    
    $
    5,378Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards,
net of related tax effects
    
    
    (603
    )
    
    
    (253
    )
    
    
    (958
    )
    
    
    (506
    )Pro forma net income (loss)
    
    $
    (2,201
    )
    
    $
    7,189
    
    
    $
    (4,081
    )
    
    $
    4,872Basic net income (loss) per
share:As reported
    
    $
    (0.07
    )
    
    $
    0.34
    
    
    $
    (0.14
    )
    
    $
    0.24Pro forma
    
    $
    (0.10
    )
    
    $
    0.32
    
    
    $
    (0.18
    )
    
    $
    0.22Diluted net income (loss)
per share:As reported
    
    $
    (0.07
    )
    
    $
    0.32
    
    
    $
    (0.14
    )
    
    $
    0.23Pro forma
    
    $
    (0.10
    )
    
    $
    0.30
    
    
    $
    (0.18
    )
    
    $
    0.21
 6




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Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Diluted net income per share is
computed based on the weighted average number of shares of common stock
outstanding for the period plus dilutive common equivalent shares including
stock options and warrants using the treasury stock method. Diluted loss per
share information is the same as basic net loss per share since common shares
issuable upon conversion of the stock options and warrants are antidilutive.
The total numbers of shares excluded from diluted net income (loss) per share
relating to these securities were 5,845,259 and 5,845,259 for the three and six months ended September 30, 2004, respectively,
compared to 1,365,443 and 2,517,897 for the same periods in fiscal year 2004. The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands except per share amounts): For the three months
    
    For the six monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (1,598
    )
    
    $
    7,442
    
    
    $
    (3,123
    )
    
    $
    5,378Basic and diluted:Weighted average shares of common
stock outstanding
    
    
    22,731
    
    
    
    22,218
    
    
    
    22,703
    
    
    
    22,193Less: Weighted average shares of
common stock subject to repurchase
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (22
    )Weighted average shares used in computing
basic net income (loss) per share
    
    
    22,731
    
    
    
    22,198
    
    
    
    22,703
    
    
    
    22,171Diluted effect of common share equivalents
    
    
    
    
    
    
    1,414
    
    
    
    
    
    
    
    1,084Weighted average shares used in computing
diluted net income (loss) per share
    
    
    22,731
    
    
    
    23,612
    
    
    
    22,703
    
    
    
    23,255Basic net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.34
    
    
    $
    (0.14
    )
    
    $
    0.24Diluted net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.32
    
    
    $
    (0.14
    )
    
    $
    0.23
 7




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Note 3. Balance Sheet Components (in thousands) September 30,
    
    March 31,2004
    
    2004Accounts receivable, net:Accounts receivable
    
    $
    368
    
    
    $
    298Less: Allowance for doubtful accounts
    
    
    (3
    )
    
    
    (3
    )$
    365
    
    
    $
    295Allowance for doubtful accounts:Balance at beginning of the year
    
    $
    3
    
    
    $
    50Addition
    
    
    
    
    
    
    15Utilized
    
    
    (
    )
    
    
    (62
    )Balance at end of the year
    
    $
    3
    
    
    $
    3Inventories:Raw materials
    
    $
    103
    
    
    $
    165Work-in-process
    
    
    164
    
    
    
    42Finished goods
    
    
    375
    
    
    
    395$
    642
    
    
    $
    602Property and equipment, net:Furniture and fixtures (Useful life of two years)
    
    $
    39
    
    
    $
    39Machinery and equipment (Useful life of two to five years)
    
    
    2,961
    
    
    
    2,775Software (Useful life of two to five years)
    
    
    2,851
    
    
    
    2,8515,851
    
    
    
    5,665Less: Accumulated depreciation and amortization
    
    
    (4,314
    )
    
    
    (3,718
    )$
    1,537
    
    
    $
    1,947Other assets:Deposits
    
    $
    54
    
    
    $
    32Other
    
    
    
    
    
    
    80$
    54
    
    
    $
    112Accrued expenses:Accrued compensation costs
    
    $
    615
    
    
    $
    421Other
    
    
    66
    
    
    
    236$
    681
    
    
    $
    657
 8




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Note 4. Short-term Investments The value of the Companys investments by major security type is as follows: As of September 30, 2004Amortized
    
    Aggregate
    
    Unrealized
    
    UnrealizedCost
    
    Fair Value
    
    Gain
    
    Loss(In thousands)Government and agency securities
    
    $
    7,000
    
    
    $
    6,983
    
    
    $
    
    
    
    $
    17US corporate and bank debt
    
    
    14,845
    
    
    
    14,797
    
    
    
    
    
    
    
    48Total
    
    $
    21,845
    
    
    $
    21,780
    
    
    $
    
    
    
    $
    65
 As of March 31, 2004Amortized
    
    Aggregate
    
    Unrealized
    
    UnrealizedCost
    
    Fair Value
    
    Gain
    
    Loss(In thousands)Government and agency securities
    
    $
    6,000
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    US corporate and bank debt
    
    
    17,939
    
    
    
    17,947
    
    
    
    8
    
    
    
    Total
    
    $
    23,939
    
    
    $
    23,947
    
    
    $
    8
    
    
    $
    
 Note 5. Concentration of Certain Risks The Company is subject to the risks associated with similar technology
companies. These risks include, but are not limited to: history of operating
losses, dependence on a small number of key individuals, customers and
suppliers, competition from larger and more established companies, the impact
of rapid technological changes and changes in customer demand and requirements. Significant customers Revenues to significant customers, those representing approximately 10% or
more of total revenues for the respective periods, are summarized as follows: 9




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Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Customer A
    
    
    31
    %
    
    
    22
    %
    
    
    26
    %
    
    
    17
    %Customer B
    
    
    21
    %
    
    
    17
    %
    
    
    28
    %
    
    
    22
    %Customer C
    
    
    15
    %
    
    
    *
    
    
    
    10
    %
    
    
    *Customer D
    
    
    *
    
    
    
    22
    %
    
    
    *
    
    
    
    16
    %
 (* = less than 10%) Concentration of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and accounts
receivable. The Company places its cash and cash equivalents in checking and
money market accounts in financial institutions. The Companys accounts
receivable are derived primarily from sales to OEMs and distributors. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential doubtful accounts. Accounts receivable were concentrated with customers as follows: September 30
    
    September 30,2004
    
    2003Accounts Receivable:Customer A
    
    
    36
    %
    
    
    *Customer B
    
    
    24
    %
    
    
    *Customer C
    
    
    14
    %
    
    
    *Customer D
    
    
    10
    %
    
    
    10
    %Customer F
    
    
    10
    %
    
    
    *Customer D
    
    
    *
    
    
    
    21
    %Customer F
    
    
    *
    
    
    
    19
    %
 (* = less than 10%) Vendor Concentration The Company does not own or operate a fabrication facility, and
accordingly relies substantially on three outside foundries, United
Manufacturing Corporation (UMC) and Taiwan Semiconductor Manufacturing
Corporation (TSMC), both located in Taiwan, and HuaHong NEC located in the
Peoples Republic of China, to supply all of the Companys semiconductor
manufacturing requirements. There are significant risks associated with the
Companys reliance on outside foundries, including the lack of ensured wafer
supply, limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs and the unavailability of or delays
in obtaining access to key process technologies. Any inability of one of the
foundries to provide the necessary components could result in significant
delays and could have a material adverse effect on the Companys business,
financial condition and results of operations. In the event either foundry
suffers financial difficulties or suffers any damage or destruction to its
respective facilities, or in the event of any other disruption of foundry
capacity, the Company may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. Substantially all of the Companys products are assembled and tested by
one of three third-party subcontractors, Siliconware Precision Industries
Ltd., and Advance Semiconductor Engineering, Inc., both located in Taiwan, and
Shanghai Belling Corp., Ltd. located in the Peoples Republic of China. The
availability of assembly and testing 10




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services from these subcontractors could be adversely affected in the event any
subcontractor experiences financial difficulties or suffers any damage or
destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. As a result of this reliance on
third-party subcontractors for assembly and testing of its products, the
Company cannot directly control product delivery schedules, which has in the
past, and could in the future, result in product shortages or quality assurance
problems that could increase the cost of manufacture, assembly or testing of
the Companys products. Note 6 . Segment and Geographic Information The Company is organized and operates in one reportable segment, which is
the development, manufacture and sale of streaming media integrated circuits
for the advanced television and emerging interactive display markets. The following table summarizes revenues by geographic area as a percentage
of total revenues: For the three months
    
    For the six monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Japan
    
    
    31
    %
    
    
    22
    %
    
    
    26
    %
    
    
    17
    %United Kingdom
    
    
    21
    %
    
    
    17
    %
    
    
    28
    %
    
    
    22
    %China
    
    
    15
    %
    
    
    4
    %
    
    
    13
    %
    
    
    3
    %Taiwan
    
    
    15
    %
    
    
    10
    %
    
    
    11
    %
    
    
    13
    %United States
    
    
    8
    %
    
    
    15
    %
    
    
    10
    %
    
    
    16
    %Germany
    
    
    0
    %
    
    
    22
    %
    
    
    0
    %
    
    
    16
    %Other
    
    
    10
    %
    
    
    10
    %
    
    
    12
    %
    
    
    13
    %
 Note 7. Commitments and Contingencies Stock Repurchase On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this
program, the Board of Directors authorized the acquisition of up to 200,000 of
the Companys common stock. As of September 30, 2004, the Company had
acquired 144,400 shares on the open market that it holds as treasury stock. On August 20, 2002, the Board of Directors authorized an additional stock
repurchase program to acquire outstanding common stock in the open market.
Under this program, the Board of Directors authorized the acquisition up to 5
million shares of common stock. As of September 30, 2004, the Company had not
repurchased any shares of common stock under this program. Litigation The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the Company is unaware of any claims
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company. 11




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##### Table of Contents



Lease Commitments The Company leases its facilities under non-cancelable operating leases
expiring at various dates through July 2005. The Company leases certain fixed
assets under capital leases expiring at various dates through February 2005. Future payments due under capital and operating leases as of September 30,
2004 are as follows (in thousands): Fiscal
    
    Capital
    
    OperatingYear
    
    Leases
    
    Leases2005
    
    $
    259
    
    
    $
    862006
    
    
    
    
    
    
    47Total minimum lease payments
    
    
    259
    
    
    $
    133Less: Amount representing interest
    
    
    (4
    )Present value of minimum payments
    
    
    255Less: Current portion
    
    
    (255
    )Long-term portion
    
    $
    
 12




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited
condensed financial statements and notes thereto set forth in Item 1 of this
report. In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, including statements regarding revenues
and sources of revenues, expenses, net losses, gross margin, customer
production, market and industry trends, competition, the reasonableness of our
accounting assumptions and the effect of certain accounting principles on our
consolidated financial statements, purchase commitments, and the uses of and
adequacy of our capital resources, that involve risks and uncertainties that
could cause actual results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled Managements Discussion and Analysis of Financial
Condition and Results of OperationsFactors That May Affect Future Results.
You should carefully review the risks described herein and in other documents
we file from time to time with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for fiscal 2004 and the other
Quarterly Report on Form 10-Q filed by us in our fiscal 2005. When used in
this report, the words expects, anticipates, estimates, and similar
expressions, as well as statements regarding Tvias focus for the future, are
generally intended to identify forward-looking statements. You should not place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forward-looking statements or reflect
events or circumstances after the date of this document. Overview We design, develop and market display processors for the
interactive-television market as well as a family of flexible, high-quality
display processors tailored to the Asia Pacific television manufacturers
creating next-generation digital LCD, HD, and progressive-scan televisions. We have a subsidiary in Hefei, Peoples Republic of China, which performs
final test, sales and research and development activities. We currently offer five product families: the TrueView 5700 family,
introduced in calendar year 2004; the CyberPro 5600 family, introduced in
calendar year 2003; the CyberPro 5202 family, introduced in calendar year 2002;
the CyberPro 5300 family, introduced in calendar year 1999; and the CyberPro
5000 family, introduced in calendar year 1998. These product families
currently generate most of our revenues. We sell our products through two
channels. First, we sell our products directly to original equipment
manufacturers, or OEMs, and recognize revenues at the time of shipment to these
OEMs. Second, we sell our products to a number of distributors. We defer
recognition of revenues for sales to our distributors until they have sold our
products to end-users. Approximately 92% and 90% of our total revenues for the three and six
months ended September 30, 2004, respectively, were derived from customers
located outside the United States compared to 85% and 84% in the same periods
in fiscal 2004. All of our revenues to date have been denominated in United
States dollars. Historically, a relatively small number of customers and
distributors have accounted for a significant portion of our product sales.
Our top three customers, including distributors, accounted for 67% and 64% of
total revenues in the three and six months ended September 30, 2004,
respectively, compared to 63% and 57% in the same periods of fiscal 2004. Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position
of our products in their respective life cycles, yields and the mix of our
product sales and development contracts and other revenues. For example, newly
introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related gross
margins typically decline over product life cycles due to competitive pressures
and volume price agreements. Our gross margin and operating results in the
future may continue to fluctuate as a result of these and other factors. 13




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##### Table of Contents



The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and inventory costs and
the generation of revenues from design wins. We have sustained operating losses on a quarterly and annual basis since
inception, except in fiscal 2004. As of September 30, 2004, we had an
accumulated deficit of approximately $65.1 million. These losses resulted from
significant costs incurred in the planning and development of our technology
and services and from significant marketing costs. We expect to experience
significant research and development expenses, as we design and market new
technologies. We anticipate an increase in revenues in the next quarter as compared to the same
period in the prior fiscal year. However, due to
increased operating expenses, we
anticipate that we will continue to incur net losses at least at the level
incurred in the quarter ended September 30, 2004 for the next quarter. Critical Accounting Policies For critical accounting policies affecting us, see Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations of
our Annual Report on Form 10-K for the year ended March 31, 2004 and on Form
10-Q for the quarter ended June 30, 2004. Critical accounting policies
affecting us have not changed materially since March 31, 2004. Results of Operations The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue: For the three months
    
    For the six monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    57
    
    
    
    57
    
    
    
    56
    
    
    
    58Gross profit
    
    
    43
    
    
    
    43
    
    
    
    44
    
    
    
    42Operating expenses:Research and development
    
    
    212
    
    
    
    224
    
    
    
    219
    
    
    
    254Sales, general and administrative
    
    
    106
    
    
    
    98
    
    
    
    115
    
    
    
    112Total operating expenses
    
    
    318
    
    
    
    322
    
    
    
    334
    
    
    
    366Operating loss
    
    
    (275
    )
    
    
    (279
    )
    
    
    (290
    )
    
    
    (324
    )Interest income
    
    
    16
    
    
    
    16
    
    
    
    17
    
    
    
    16Gain on sale of software business
    
    
    
    
    
    
    1,464
    
    
    
    
    
    
    
    756Net income (loss)
    
    
    (259
    )%
    
    
    1,201
    %
    
    
    (273
    )%
    
    
    448
    %
 Revenues. Revenues for the three months ended September 30, 2004 and 2003
were approximately the same at $0.6 million. Revenues decreased to $1.1
million in the six months ended September 30, 2004, compared to $1.2 million in
the six months ended September 30, 2003. Revenues slightly decreased from
fiscal 2004 to fiscal 14




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##### Table of Contents



2005 primarily due to a slower than anticipated emergence of the
interactive television market and weak global general economic conditions.
Revenues to Kanematsu Devices Corporation, SMS Electronics, Ltd. and Chang
Tseng Technology Co., Ltd. accounted for 31%, 21% and 15%, respectively, of
total revenues for the three months ended September 30, 2004. Sales to
Kanematsu Devices Corporation, Fujitsu-Siemens, Inc. and SMS Electronics, Ltd.
accounted for 22%, 22% and 17% of our total revenues for the three months ended
September 30, 2003, respectively. Revenues to SMS Electronics, Ltd.,
Kanematsu Devices Corporation and Chang Tseng Technology Co., Ltd. accounted
for 28%, 26% and 10%, respectively, of total revenues for the six months ended
September 30, 2004. Sales to SMS Electronics, Ltd., Kanematsu Devices
Corporation and Fujitsu-Siemens, Inc. accounted for 22%, 17% and 16% of our
total revenues for the six months ended September 30, 2003, respectively. We
anticipate an increase in revenues in the next quarter as compared to the same period in
the prior fiscal year. Gross margin. Gross margin for the three and six months ended September
30, 2004 was 43% and 44%, respectively, compared to 43% and 42% in the same
periods of fiscal 2004. The increase in gross margin in the six months ended
September 30, 2004 compared to the same period in fiscal 2003 resulted
primarily from lower overhead burden. The reduction in overhead burden was due
to lower headcount and facility costs. Many factors affect our gross margin,
including, but not limited to, our product mix, the position of our products in
their respective life cycles, yields and the mix of our product sales and
development contracts and other revenues. We expect our gross margin in the
next quarter will be similar to the quarter ended September 30, 2004. Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors for next generation high
definition digital LCD TVs, progressive CRT TVs, and interactive set-top boxes.
Research and development expenses decreased to $1.3 million and $2.5 million
in the three and six months ended September 30, 2004 from $1.4 million and $3.0
million in the three and six months ended September 30, 2003. Research and
development expenses as a percentage of total revenues were 212% and 219% in
the three and six months ended September 30, 2004 compared to 224% and 254% in
the same periods of fiscal 2004. The decrease in research and development
expenses in absolute dollars and as a percentage of revenues in the three and
six months ended September 30, 2004 compared to the same periods of fiscal 2004
is attributable primarily to lower headcount resulting from the sale of our
software unit to MediaTek, Inc. in July 2003. Headcount in research and
development decreased from 208 in June 2003 to 91 in September 2004. Absolute
research and development expenses may increase in the next quarter, as compared
to the quarter ended September 30, 2004, due to product development prototype
expenses. Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses remained flat at $0.7 and $1.3
million in the three and six months ended September 30, 2004, respectively,
compared to $0.6 million and $1.3 million in the three and six months ended
September 30, 2003, respectively. Sales, general and administrative expenses
as a percentage of total revenues was 106% and 115% in the first three and six
months of fiscal year 2005 compared to 98% and 112% in the same periods of
fiscal year 2004. We expect that sales, general and administrative expenses
in the next quarter will be higher than the quarter ended September 30, 2004 as
the Company added several headcount to the sales and marketing organization to
support the Asia-Pacific market, and due to Sarbanes-Oxley compliance
requirements. Interest income. Interest income was $0.1 million and $0.2 million for
the three and six months ended September 30, 2004, respectively, compared to
$0.1 million and $0.2 million for the three and six months ended September 30,
2003, respectively. Gain on sale of software unit.The Company recorded a gain on a sale of
its software business and software-related assets to MediaTek, Inc. in exchange
for $10 million in cash in the second quarter ended September 30, 2003.
Expenses related to this transaction amounted to $0.9 million. Provision for income tax. We are taxed in our jurisdictions of operations
based on the extent of taxable income generated in each jurisdiction. For
income tax purposes, revenues are attributed to the taxable jurisdiction where
the sales transactions generating the revenues were initiated. We incurred
operating losses in the three and six months ended September 30, 2004, and
therefore made no provision for income tax in these periods. No provision for
income taxes was recorded for the income in the three and six months ended
September 30, 2003 as a 15




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result of net operating losses carried over from prior years. Due to
recurring losses, we continue to record a full valuation allowance against all
of our net deferred tax assets due to uncertainty as to their future
realization. Liquidity and Capital Resources During the six months ended September 30, 2004, $2.8 million of cash and
cash equivalents were used in our operating activities as compared to $2.3
million provided during the six months ended September 30, 2003. Cash used in
operations during the six months ended September 30, 2004 resulted primarily
from the net loss of $3.1 million and an increase in other current assets of
$0.3 million, partially offset by non-cash items of depreciation and
amortization of $0.6 million and a write down of licensed technology of $0.1
million. Cash provided by operations during the six months ended September 30,
2003 resulted primarily from net income of $5.4 million, non-cash items of
depreciation and amortization of $0.9 million and a decrease in inventories of
$0.4 million, partially offset by an increase in other current assets of $4.1
million, and a decrease in accrued liabilities and other of $0.4 million. Cash flows provided by investing activities were $2.7 million during the
six months ended September 30, 2004 compared to cash flows of $8.8 million used
in investing activities during the six months ended September 30, 2003. In the
six months ended September 30, 2004, $6.6 million and $0.8 million were
provided by the maturity of short-term investments and proceeds from the sale
of the software business unit, respectively, while $4.5 million and $0.2
million were used to purchase short-term investments and property and
equipment, respectively. In the six months ended September 30, 2003, $19.0
million was provided by the maturity of short-term investments while $27.7
million was used to purchase short-term investments. As of September 30, 2004,
we did not have any significant capital purchase commitments. Net cash flows used in financing activities were $0.1 million and $0.1
million for the six months ended September 30, 2004 and 2003, respectively.
They were attributable to payments of capital leases, partially offset by the
proceeds from the sale of common stock under our Stock Incentive Plan and
Employee Stock Purchase Plan. Working capital at September 30, 2004 was $22.3 million. The following represent our significant working capital commitments: Stock Repurchases On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this
program, the Board of Directors authorized the acquisition of up to 200,000
shares of the Companys common stock. As of September 30, 2004, the Company
had acquired 144,400 shares on the open market that it holds as treasury stock.
Based on the closing price of the Companys common stock on the NASDAQ
SmallCap Market on September 30, 2004, the aggregate funds used to acquire up
to 55,600 shares of the Companys common stock, if purchased, would have a
minimal impact on the Companys current cash, cash equivalent and short-term
investment balances. On August 20, 2002, the Board of Directors authorized an additional stock
repurchase program to acquire outstanding common stock in the open market.
Under this program, the Board of Directors authorized the acquisition of up to
5 million shares of common stock. As of September 30, 2004, we had not
repurchased any shares of common stock under this program. Leases The Company leases its facilities under non-cancelable operating leases
expiring at various dates through July 2005. The Company leases certain fixed
assets under capital leases expiring at various dates through February 2005. 16




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##### Table of Contents



Future payments due under capital and operating leases as of September 30, 2004
are as follows (in thousands): Fiscal
    
    Capital
    
    OperatingYear
    
    Leases
    
    Leases2005
    
    $
    259
    
    
    $
    862006
    
    
    
    
    
    
    47Total minimum lease payments
    
    
    259
    
    
    $
    133Less: Amount representing interest
    
    
    (4
    )Present value of minimum payments
    
    
    255Less: Current portion
    
    
    (255
    )Long-term portion
    
    $
    
 As of September 30, 2004, we had approximately $162,000 of outstanding
purchase commitments with a supplier for the purchase of wafers and a packaging
subcontractor. We expect to receive and pay for the wafers, within the next
six months, from our existing cash balances. Based on our current expectations, we believe that our principal source of
liquidity consisting of our cash and cash equivalents and short-term
investments, which totaled $24.8 million at September 30, 2004, will be
sufficient to meet our working capital and capital requirements through at
least the next twelve months. We may also utilize cash to acquire or invest
in complementary businesses or to obtain the use of complementary technologies. 17




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##### Table of Contents



Factors that May Affect Future Results We expect continuing losses and may not achieve profitability which could
affect our ability to expand our business. We have incurred significant operating losses in each year since our
inception, except in fiscal 2004. The net income reported in fiscal year 2004
was primarily due to the sale of our software business. We expect to continue
to incur net losses for the foreseeable future, primarily as a result of
expenses for research and development. We have incurred net losses of
approximately $65.1 million from our inception in March 1993 through September
30, 2004. If we continue to incur net losses, we may not be able to expand our
business as quickly as we would like. We do not know when or if we will become
profitable and if we do become profitable, we may not be able to sustain or
increase our profitability. Our future operating results are likely to fluctuate and may fail to meet
expectations which could cause our stock price to decline. Our operating results have varied in the past and are likely to do so in
the future as we attempt to meet consumer demand in the markets for advanced
televisions and emerging interactive displays. Our future operating results
will depend on many factors and may fail to meet our expectations for a number
of reasons. Any failure to meet these expectations or those of securities
analysts and investors could cause our stock price to fluctuate or decline
significantly. A number of factors, including those listed below, may cause
fluctuations in our operating results and stock price:  
    
    the general condition of the semiconductor industry
market;  
    
    fluctuations in the volume of product sales, changes in product mix and pricing concessions on
sales;  
    
    the timing, rescheduling or cancellation of significant customer orders;  
    
    our ability to specify, develop, introduce and market new products with smaller geometries,
more features and higher levels of design integration in accordance
with design requirements
and design cycles;  
    
    the timing of investments in, and the results of, research and development;  
    
    product introductions and price changes by our competitors;  
    
    changes in industry standards;  
    
    the level of orders received that can be shipped in a given period;  
    
    introduction of interactive television services by service providers;  
    
    availability of manufacturing capacity and raw materials, and inventory write-offs;  
    
    changes in earning estimates or investment recommendations by analysts;  
    
    changes in investors perceptions; and  
    
    the effect of the terrorist attacks in the United
States and any related conflicts or similar events
worldwide. 18




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##### Table of Contents



A significant amount of our revenues comes from a few customers and any
decrease in revenues from these customers could significantly impact our
financial results. Historically we have been, and we expect to continue to be, dependent on a
relatively small number of OEMs and distributors for a significant portion of
our total revenues. Sales to Kanematsu Devices Corporation, SMS Electronics,
Ltd. and Chang Tseng Technology Co., Ltd. accounted for 31%, 21% and 15%,
respectively, of total revenues for the three months ended September 30, 2004.
Sales to Kanematsu Devices Corporation, Fujitsu-Siemens, Inc. and SMS
Electronics, Ltd. accounted for 22%, 22% and 17%, respectively, of our total
revenues for the three months ended September 30, 2003. Sales to SMS
Electronics, Ltd., Kanematsu Devices Corporation and Chang Tseng Technology
Co., Ltd. accounted for 28%, 26% and 10%, respectively, of total revenues for
the six months ended September 30, 2004. Sales to SMS Electronics, Ltd.,
Kanematsu Devices Corporation and Fujitsu-Siemens, Inc. accounted for 22%, 17%
and 16%, respectively, of our total revenues for the six months ended September
30, 2003. We may not be able to retain our largest customers or to obtain
additional key accounts. Any reduction or delay in sales of our products to
one or more key customers or our inability to successfully develop
relationships with additional key customers could negatively impact our
financial results. Because the emergence of the interactive television market has been slower than
anticipated, we may not be able to sell our products or sustain our business. Our multi-media display processors are incorporated into products that
allow interactive television. The concept of interactive television and the
market for products that facilitate it are new and developing. As a result,
our profit potential is unproven and may never materialize. Broad acceptance
of advanced televisions and emerging interactive displays will depend on the
extent to which consumers use devices other than personal computers to access
the Internet. To date, the market for these products has not developed as
quickly as our customers and we had previously anticipated. Consequently,
certain of our customers have significant inventory of our semiconductors or
products that incorporate our semiconductors, thereby limiting the opportunity
to sell additional semiconductors to these customers until their present
inventories are depleted. Our success will also depend on the ability of OEMs
and service providers that work with our OEMs to create demand for and market
the products incorporating our semiconductors. Unless a sufficiently large
market for advanced televisions and emerging interactive displays and other
products that are used for interactive television develops, demand for products
incorporating our semiconductor solutions may not be sufficient to sustain our
business. Customers may cancel or defer significant purchase orders, or our distributors
may return our products, which would cause our inventory levels to increase and
our revenues to decline. We sell our products on a purchase order basis through our direct sales
channel, sales representatives and distributors, and our customers may cancel
or defer purchase orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when the distributors have sold our
products to their customers. We recognize revenues on sales to our OEM
customers when we ship our products to the OEM. We permit certain of our
distributors to return products to us. If our customers cancel or defer
significant purchase orders or our distributors return our products, our
inventories would increase and our revenues would decrease, which would
materially harm our business, as increases in inventory reserves could be
required. Refusal of OEM customers to accept shipped products or delays or
difficulties in collecting accounts receivable could have an adverse effect on
our business. Because of our long product development process and sales cycle, we incur
substantial expenses before we generate revenues and may not recover our
expenditures. To develop market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
develop products based on forecasts of demand and we incur substantial product
development expenditures prior to generating associated revenues. Our
customers typically perform numerous tests and extensively evaluate our
products before incorporating them into their systems. The time required for
testing, evaluating and designing our products into a customers equipment can
take up to nine months or more, with an additional three to nine months or more
before an OEM customer commences volume production of equipment incorporating
our products, if ever. Because of this lengthy development cycle, we may 19




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experience a delay between the time we accrue expenses for research and
development and sales and marketing efforts and the time when we generate
revenues, if any. Furthermore, achieving a design win with a customer does not necessarily
mean that this customer will order large volumes of our products. A design win
is not a binding commitment by a customer to purchase our products. Rather, it
is a decision by a customer to use our products in the design process. In
addition, our customers can choose at any time to discontinue using our
products in that customers designs or product development efforts. If our
products are chosen to be incorporated into a customers products, we may still
not realize significant revenues from that customer if that customers products
are not commercially successful. As a result, our profitability from quarter
to quarter and from year to year may be materially affected by the number and
timing of our new product introductions in any period and the level of
acceptance gained by these products. If we fail to successfully develop, introduce and sell new products, we may be
unable to effectively compete in the future. We operate in a highly competitive, quickly changing environment marked by
new and emerging products and technologies. Our success depends on our ability
to develop, introduce and successfully market new products and enhance our
existing products in the advanced television and emerging interactive display
markets. The development of these new products is highly complex and, from
time to time, we have experienced delays in completing their development and
introduction. Any one of the following factors could affect our ability to
develop, introduce and sell new products and could materially harm our
business:  
    
    our failure to complete new product designs in a timely manner;  
    
    our inability to manufacture our new products according to design specifications;  
    
    our inability to deliver our products to our customers in a
timely manner for any reason, including a lack of manufacturing capacity or the failure of our
contracted foundries to meet
targeted manufacturing yields; and  
    
    our sales forces and independent distributors
inability to create adequate demand for our
products. Our industry is highly competitive, and we cannot assure you that we will be
able to effectively compete. The market for advanced televisions and emerging interactive displays in
particular, and the semiconductor industry in general, are highly competitive.
We compete with a number of domestic and international suppliers of
semiconductors in our targeted markets. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter
our targeted markets. We believe that we must compete on the basis of a
variety of factors, including:  
    
    functionality;  
    
    performance;  
    
    time to market;  
    
    price;  
    
    conformity to industry standards;  
    
    product road maps; and  
    
    technical support. 20




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We currently compete with ATI Technologies, Inc., Broadcom Corporation,
Genesis Microchip, Inc., Pixelworks, Inc., Trident Microsystems, Inc. and
Silicon Image, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the multi-media
display processors, advanced television emerging display markets become more
established. A number of companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor Corporation,
Equator Technologies, Inc., LSI Logic and Philips Electronics N.V., have
announced that they are developing or plan to introduce competing products in
the advanced television and emerging interactive display markets which could
result in significant competition. Some of our current and potential competitors operate their own
fabrication facilities or have a longer operating history and significantly
greater financial, sales and marketing resources. They may also have
preexisting relationships with our customers or potential customers. As a
result, these competitors may be able to adapt more quickly to new or emerging
products, develop new technologies, or address changes in customer requirements
or devote greater resources to the development and promotion of strategic
relationships among themselves or with existing or potential customers. It is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Increased competition could harm our
business, results of operations and financial condition by, for example,
increasing pressure on our profit margin or causing us to lose sales
opportunities. We depend on three independent foundries to manufacture our products based on
our forecasts, which could result in an oversupply or undersupply of products. We do not own or operate our own fabrication facility. We currently
depend upon three outside foundries, United Manufacturing Corporation, or UMC,
and Taiwan Semiconductor Manufacturing Corporation, or TSMC, both in Taiwan,
and HuaHong NEC in the Peoples Republic of China. We do not have long term
supply agreements with these foundries to manufacture our semiconductor
products. Each of these foundries has limited manufacturing capacity. The foundries require us to provide forecasts of our anticipated
manufacturing orders in advance of receiving purchase orders from our
customers. This may result in product shortages or excess product inventory.
Obtaining additional supply in the face of product shortages may be costly or
not possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business. For example, in
fiscal 2002 we took an inventory charge related to slow moving inventory. The
foundries may allocate capacity to the production of other companies products
while reducing delivery to us on short notice. Our growing presence within the Peoples Republic of China subjects us to risks
of economic and political instability in the area, which could adversely impact
our results of operations. A potentially increasing portion of our products are manufactured by
foundries located in the Peoples Republic of China, or the PRC. Disruptions
from natural disasters, health epidemics (including new outbreaks of SARS and
of the Bird flu) and political, social and economic instability may affect the
region, and would have a negative impact on our results of operations. In
addition, the economy of the PRC differs from the economies of many countries
in respects such as structure, government involvement, level of development,
growth rate, capital reinvestment, allocation of resources, self-sufficiency,
rate of inflation and balance of payments position, among others. In the past,
the economy of the PRC has been primarily a planned economy subject to state
plans. Since the entry of the PRC into the World Trade Organization in 2002,
the PRC government has been reforming its economic and political systems. These
reforms have resulted in significant economic growth and social change. We
cannot assure, however, that the PRC governments policies for economic reforms
will be consistent or effective. Our results of operations and financial
position may be harmed by changes in the PRCs political, economic or social
conditions. We may encounter periods of semiconductor oversupply, resulting in pricing
pressure, as well as undersupply, resulting in a risk that we could be unable
to fulfill our customers requirements. The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These
fluctuations have resulted in circumstances when supply and demand for the 21




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industrys products have been widely out of balance. Our operating
results may be materially harmed by industry wide semiconductor oversupply,
which could result in severe pricing pressure or inventory write-downs. For
example, in fiscal 2002 we took an inventory charge for slow moving inventory,
which negatively impacted our gross margin for fiscal 2002. On the other hand,
in a market with undersupply, we would have to compete with larger companies
for limited manufacturing capacity. If material shortages occur, we may incur
additional costs to procure the scarce components or be unable to have our
products manufactured in a timely manner or in quantities necessary to meet our
requirements. Since we outsource all of our manufacturing, we are particularly
vulnerable to supply shortages. As a result, we may be unable to fill orders
and may lose customers. Any future industry wide oversupply or undersupply of
semiconductors would materially harm our business and have a negative impact on
our earnings. If we have to qualify new independent foundries for any of our products and do
not have sufficient supply of our products on hand, we may lose revenues and
damage our customer relationships. Processes used to manufacture our products are complex, customized to our
specifications and can only be performed by a limited number of manufacturing
facilities. The foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start up of new process
technologies. In addition, the foundries we use are located in a seismically
active area, and earthquakes have caused these foundries to close for repairs,
resulting in a delay in manufacturing our products. Although we primarily utilize three independent foundries, most of our
components are not manufactured at all of these three foundries at any given
time. The inability of one of the foundries to provide components could result
in significant delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered any damage or
destruction to its facilities, or in the event of any other disruption of
foundry capacity, we may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. For example, in
September 1999, Taiwan experienced a major earthquake. The earthquake and its
resulting aftershocks caused power outages and significant damage to Taiwans
infrastructure. Similarly, in September 2001, a typhoon hit Taiwan causing
businesses in Taipei and the financial markets to close for two days. In
addition, as a result of the rapid growth of the semiconductor industry based
in the industrial park where both foundries are located, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity or a natural disaster could adversely affect
these foundries ability to supply our products, which could have a material
adverse effect on our operating results. Even our current outside foundries would need to have manufacturing
processes qualified in the event of a disruption at the other foundry, which we
may not be able to accomplish in a timely manner sufficient to prevent an
interruption in the supply of the affected products. We cannot assure you that
any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have
sufficient capacity to meet our needs. If our manufacturing requirements are
not satisfied, our business would be materially harmed. Our semiconductors are complex to manufacture and may have errors or defects
which could be costly to correct. The manufacture of semiconductors is a complex process. Foundries may not
achieve acceptable product yields from time to time due to the complexity of
the integrated circuit design, inadequate manufacturing processes and other
reasons. We refer to the proportion of final acceptable integrated circuits
that have been processed, assembled and tested relative to the gross number of
integrated circuits that could have been produced from the raw materials as our
product yields. Identifying defects and determining the reason for low yields
may be discovered after production has begun and at various stages of the
production cycle. Our failure to discover defects early in the production
cycle will result in higher costs and may require a diversion of our technical
personnel and resources away from product development in order to correct the
defect. In addition, defective products that have been released into the
market and distributed to our customers and end users may result in harm to our
reputation, significant warranty costs, diversion of our technical and
managerial resources and potential product liability claims that would be
costly to defend. 22




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Our software is complex and may have bugs or defects which could be costly to
correct. Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly
when first introduced or when new versions are released. Determining whether
our software has defects may occur after our products are released into the
market and distributed to our customers and end users, and may result in harm
to our reputation, significant warranty costs, diversion of our technical
resources and potential product liability claims that would be costly to defend
and divert managerial resources. We face foreign business, political and economic risks because a majority of
our sales are to customers outside of the United States. Sales of our products to our OEM customers and to distributors located
outside the United States accounted for 76%, 86%, 32%, 92% and 90% of our total
revenues in fiscal years 2004, 2003, and 2002, and three and six months ended
September 30, 2004, respectively. We anticipate that sales to customers
located outside the United States will continue to represent a significant
portion of our total sales in future periods. In addition, many of our
domestic customers sell their products outside of North America, thereby
indirectly exposing us to risks associated with foreign commerce. Asian
economic instability impacts the sales of products manufactured by our
customers, as does the Chinese New Year, during which time many manufacturers
and businesses close their operations. We may be negatively impacted by
terrorist attacks and related or other conflicts worldwide. We could also
experience greater difficulties collecting accounts receivable from customers
outside of the United States. Accordingly, our operations and revenues are
subject to a number of risks associated with foreign commerce. To date, we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value
of the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country
may decline. To the extent any of these types of risks materialize, our
business would be materially harmed. If the industries into which we sell our products experience recession or other
cyclical effects impacting our customers budgets, our operating results could
be negatively impacted. The primary customers for our products are companies in the advanced
television and emerging display device markets. Any significant downturn in
these particular markets or in general economic conditions which result in the
cutback of research and development budgets or capital expenditures would
likely result in the reduction in demand for our products and services and
could harm our business. For example, the United States economy, including the
semiconductor industry, has experienced a recession, which has negatively
impact our business and operating results. If the economy declines as a result
of terrorist attacks or economic, political and social turmoil, existing and
perspective customers may continue to reduce their design budgets or delay
implementation of our products, which could further harm our business and
operating results. In addition, the markets of semiconductor products are cyclical. In
recent years, some Asian countries have experienced significant economic
difficulties, including devaluation and instability business failures and a
depressed business environment. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced budgets for chip
design tools. In addition, the electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its products, and
this trend may continue in the future. These industry downturns have been, and
may continue to be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices. As a
result, our future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors.
Any negative factors affecting the semiconductor industry, including the
downturns described here, could significantly harm our business, financial
condition and results of operations. We depend on key personnel, the loss of whom would impair or inhibit the growth
of our business. Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on Eli
Porat, our Chief Executive Officer and President. The competition for
employees with technical skills is 23




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intense and we may not be able to attract and retain a sufficient number
of such qualified new personnel in the future. The loss of the service of one
or more of our key employees, or our failure to attract, retain and motivate
qualified personnel would inhibit the growth of our business. If we are unable to maintain our listing on the Nasdaq SmallCap Market, the
price and liquidity of our common stock may decline. Beginning at the commencement of trading on December 4, 2002, our common
stock was listed on the Nasdaq SmallCap Market. The transfer of our common
stock to the Nasdaq SmallCap Market will result in decreased liquidity of our
common stock and may further decrease the price per share of our common stock.
There can be no assurance that we will be able to satisfy all of the
quantitative maintenance criteria for continued listing on the Nasdaq SmallCap
Market including a continued minimum bid price of $1.00 per share. If we fail
to maintain continued listing on the Nasdaq SmallCap Market and must move to a
market with less liquidity, our financial condition could be harmed and our
stock price would likely decline. If we are delisted, it could have a material
adverse effect on the market price of, and the liquidity of the trading market
for our common stock. We rely on strategic relationships to commercialize our products, and these
relationships may require that we expend significant resources without
guarantees that our endeavors will be profitable. We rely on strategic relationships with some of our customers who we
believe are the market leaders in our target markets. These relationships
often involve the proposed development by us of new products involving
significant technological challenges. Since the proposed products under
development may offer potential competitive advantages to our customers,
considerable pressure is frequently placed on us to meet development schedules.
While an essential element of our strategy involves establishing such
relationships, these projects require substantial amounts of our limited
resources, with no guarantee of revenues to us, and could materially detract
from or delay the completion of other important development projects. Delays in
development could impair the relationship between our customers and us and
negatively impact sales of the products under development. Moreover, our
customers may develop their own solutions for products currently supplied by
us, which could have an adverse effect on our business. We depend on third party subcontractors for assembly of our semiconductors
which reduces our control over the delivery, quantity, quality, or cost of our
products. Substantially all of our products are assembled by one of three
subcontractors, two of which are located in Taiwan and one in the Peoples
Republic of China. Typically, we procure services from these subcontractors on
a purchase order basis. Their availability to assemble our products could be
adversely affected if either subcontractor experiences financial difficulties
or suffers any damage or destruction to its facilities or any other disruption
of its assembly capacity. Because we rely on third party subcontractors for
assembly of our products, we cannot directly control product delivery
schedules. We have experienced in the past, and may experience in the future,
product shortages or quality assurance problems that could increase the cost of
manufacturing or testing of our products. It is time consuming and difficult to
find and qualify alternative assemblers. If we are forced to find substitute
subcontractors, shipments of our products could be delayed. Any problems
associated with the delivery, quantity or cost of our products could harm our
business. Political instability in the Peoples Republic of China or Taiwan could harm
our manufacturing and research and development capabilities and negatively
impact our product sales. We operate our research and development facility in the Peoples Republic
of China. In addition, almost all of our products are manufactured and
assembled outside of the United States at facilities operated by third parties
in Taiwan and the Peoples Republic of China. The political and economic
conditions in the region, including the Peoples Republic of Chinas dispute
with Taiwan, may adversely impact our operations including manufacture and
assembly of our products and research and development efforts. We cannot
assure you that restrictive laws or policies on the part of either the Peoples
Republic of China or the United States will not constrain our ability to
operate in both countries. If we are required to relocate our facilities, our
business will be disrupted and our costs associated with research and
development will increase. 24




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If our competitors use our intellectual property and proprietary rights, our
ability to compete would be impaired. Our success depends in part upon our rights in proprietary technology and
processes that we develop and license from, and to, others. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and strategic
partners in order to protect proprietary technologies that use our products.
We cannot assure you that these measures will provide meaningful protection for
our proprietary technologies and processes, and they do not prevent independent
third party development of competitive products. In addition, it is difficult
to monitor unauthorized use of technology, particularly in foreign countries
where laws may not protect our proprietary rights as fully as in the United
States. We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the claims we seek, if at all, or whether any patents we have or may receive
will be challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products. We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business. Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense
to us. Litigation would also divert the efforts of our technical and
management personnel, whether or not the litigation is determined in our favor.
Litigation could also require us to develop non-infringing technology or enter
into royalty or license agreements. These royalty or license agreements may
not be available on acceptable terms, including limitations on representations
and warranties regarding infringement and indemnification in the event of
infringement claims. Our failure or inability to develop non-infringing
technology, license the proprietary rights on a timely basis or receive
appropriate protection on licensed technology would harm our business. Regulation of our customers products may slow the process of introducing new
products and could impair our ability to compete. The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers.
Although our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products
are incorporated, are subject to direct government regulation. For example,
before they can be sold in the United States, advanced televisions and emerging
interactive displays must be tested and certified by Underwriters Laboratories
and meet FCC regulations. Accordingly, the effects of regulation on our
customers or the industries in which our customers operate may, in turn, harm
our business. FCC regulatory policies affecting the ability of cable operators
or telephone companies to offer certain services and other terms on which these
companies conduct their business may impede sales of our products. In addition,
our business may also be adversely affected by the imposition of tariffs,
duties and other import restrictions on systems of suppliers or by the
imposition of export restrictions on products that we sell internationally.
Changes in current laws or regulations or the imposition of new laws or
regulations in the United States or elsewhere could harm our business. 25




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Discussion of Market Interest Rate Risk For quantitative and qualitative disclosures about market risks affecting
us, see Item 7A Quantitative Disclosure About Market Risk of our Annual
Report on Form 10-K for the year ended March 31, 2004 and on Form 10-Q for the
quarter ended June 30, 2004. Our exposure to market risk has not changed
materially since March 31, 2004. 26




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ITEM 4: CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures.We maintain
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), that are
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to them by others within those entities, particularly during the period
in which this Quarterly Report on Form 10-Q was being prepared. (b) Changes in internal control over financial reporting.There was no
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) identified in connection with the evaluation
described in Item 4(a) above that occurred during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 
 PART II: OTHER INFORMATION 
 ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS On August 3, 2004, we held our 2004 Annual Meeting of Stockholders at
which our stockholders approved the following:  (a)
    
    Election of two Class I directors to serve until the 2007
Annual Meeting of Stockholders and thereafter until the successors
are elected and qualified: For
    
    WithheldR. David Dicioccio
    
    
    18,417,406
    
    
    
    18,400Eli Porat
    
    
    18,413,901
    
    
    
    21,905
  (b)
    
    Ratification of the appointment of PricewaterhouseCoopers LLP
as our independent registered public accounting firm for the current
year: For
    
    Against
    
    Abstain18,422,341
    
    
    
    11,500
    
    
    
    1,965
 27




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ITEM 6: EXHIBITS ExhibitNumber31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**
    28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. TVIA, INC.November 11, 2004
    By:
    /s/ Diane BjorkstromDiane BjorkstromChief Financial Officer and Vice President,
Administration
(Principal Financial Officer and
Duly Authorized Signatory) 29




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EXHIBIT INDEX ExhibitNumber31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**